Small businesses face unique challenges when filing tax returns. Frequently, finances (i.e., income and/or expenses) for a small business are spread across multiple financial accounts (e.g., checking accounts, credit card accounts, money market accounts, or any other type of financial account). In such cases, consolidating finances from all of the financial accounts may be helpful to determine total financial amounts to be entered on a tax form for the small business.
Further, in many cases, one or more financial accounts is used not only for business finances, but also for personal finances (e.g., finances for a sole proprietor of the small business, or any other individual(s) associated with the small business). Accordingly, in preparation for a tax filing, it may be helpful to categorize financial records associated with the shared financial account(s), to determine which financial records are related to business finances, and which financial records are related to personal finances.
Additionally, for many or all of the financial records associated with the small business (i.e., financial records, from one or more financial accounts, that are not associated with personal finances), it may be necessary to determine to which tax categories the financial records apply. Proper categorization of financial records may impact the accuracy of the tax filing and/or any tax deductions applicable to the tax filing.
Typically, to categorize financial records for a small business, historical financial documents (e.g., receipts, invoices, ledgers, or any other physical financial documents) are maintained throughout the tax year. In preparation for a tax filing, the financial documents are then organized based on tax categories available on a tax form for the small business. This method of categorization depends heavily on reliable maintenance of the financial documents and good knowledge of the relationships between the financial documents and the available tax categories. Further, maintenance and/or categorization of the financial documents may be quite time-consuming.